JOHN D. AND CATHERINE T. MACARTHUR FOUNDATION CONSOLIDATED FINANCIAL STATEMENTS
Crowe Horwath LLP Independent Member Crowe Horwath International INDEPENDENT AUDITOR'S REPORT The Board of Directors John D. and Catherine T. MacArthur Foundation Report on the Financial Statements We have audited the accompanying consolidated financial statements of John D. and Catherine T. MacArthur Foundation (the Foundation), which comprise the consolidated statements of financial position as of, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Foundation s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Foundation s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1
Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of John D. and Catherine T. MacArthur Foundation as of December 31, 2017 and 2016, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating statement of financial position, consolidating statement of activities and consolidating statement of cash flows are presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, changes in net assets, and cash flows of the individual entities, and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Chicago, Illinois June 13, 2018 Crowe Horwath LLP 2
Consolidated Statements of Financial Position 2017 2016 (000's omitted) Assets Cash and cash equivalents $ 20,434 $ 6,449 Investments 6,806,223 6,116,212 Program-related investments 132,076 139,615 Assets held for charitable use 28,607 22,580 Other assets 12,427 10,346 Total assets $ 6,999,767 $ 6,295,202 Liabilities and net assets Grants payable $ 534,187 $ 311,991 Other liabilities 104,305 70,135 Excise and income taxes 22,045 10,571 Total liabilities 660,537 392,697 Unrestricted net assets 6,339,230 5,902,505 Total liabilities and net assets $ 6,999,767 $ 6,295,202 The accompanying notes are an integral part of the financial statements. 3
Consolidated Statements of Activities For the years ended Investment income 2017 2016 (000's omitted) Interest, dividends and other income $ 26,588 $ 22,684 Realized gain on investments 689,709 280,435 Total investment income 716,297 303,119 Investment expenses Administrative 16,328 14,581 Excise and income tax 3,938 3,556 Total investment expenses 20,266 18,137 Unrealized gain on investments 271,818 117,882 Net investment income 967,849 402,864 Operating expenses Grants authorized 470,710 251,416 Administrative 52,420 46,636 Post-retirement benefits 7,994 7,055 Total operating expenses 531,124 305,107 Change in unrestricted net assets 436,725 97,757 Unrestricted net assets, beginning of year 5,902,505 5,804,748 Unrestricted net assets, end of year $ 6,339,230 $ 5,902,505 The accompanying notes are an integral part of the financial statements. 4
Consolidated Statements of Cash Flows Cash flows from operating activities For the years ended 5 2017 2016 (000's omitted) Change in unrestricted net assets $ 436,725 $ 97,757 Adjustments to reconcile change in unrestricted net assets to net cash used in operating activities Depreciation 1,735 1,511 Amortization of deferred financing costs 27 14 Realized gain on investments (689,709) (280,435) Unrealized gain on investments (271,818) (117,882) Increase in non-investment assets (2,331) (4,294) Increase (decrease) in grants payable 222,196 (13,787) Increase in other liabilities 14,182 8,491 Increase in excise and income taxes 11,474 3,164 Net cash used in operating activities (277,519) (305,461) Cash flows from investment activities Proceeds from sale of investments 2,434,693 3,582,857 Purchase of investments (2,163,177) (3,278,044) Net cash provided by investment activities 271,516 304,813 Cash flows from financing activities Proceeds from notes payable 19,988 2,896 Net cash provided by financing activities 19,988 2,896 Net increase in cash and cash equivalents 13,985 2,248 Cash and cash equivalents at beginning of year 6,449 4,201 Cash and cash equivalents at end of year $ 20,434 $ 6,449 Supplemental disclosure of cash flow information: Cash paid for interest $ 301 $ 7 Non-cash financing activity Financing fees paid through note payable $ - $ 400 The accompanying notes are an integral part of the financial statements.
1. Organization John D. and Catherine T. MacArthur Foundation John D. and Catherine T. MacArthur Foundation ( MacArthur ) is a private, independent grantmaking foundation that supports creative people, effective institutions, and influential networks building a more just, verdant, and peaceful world. MacArthur is placing a few big bets that truly significant progress is possible on some of the world s most pressing social challenges, including over-incarceration, global climate change, nuclear risk, and significantly increasing financial capital for the social sector. In addition to the MacArthur Fellows Program, MacArthur continues its historic commitments to the role of journalism in a responsible and responsive democracy, as well as the strength and vitality of our headquarters city, Chicago. MacArthur is one of the nation s largest independent foundations. Organizations supported by the Foundation work in about 50 countries. In addition to Chicago, MacArthur has offices in India, Mexico, and Nigeria. Arc Chicago, LLC ( Arc ) is a limited liability company organized under the laws of the State of Delaware. Arc was formed on April 20, 2016, and MacArthur is its sole member. Arc provides loans and other investments to eligible nonprofits and social enterprises that help meet significant community needs in the Chicago region, such as education and child care, access to healthy food, quality affordable housing, energy conservation, job training, and more. The accompanying consolidated financial statements have been prepared on the accrual basis of accounting and include the accounts of MacArthur and Arc (collectively referred to as the Foundation ). All significant intercompany transactions between these entities have been eliminated from the accompanying consolidated financial statements. 2. Summary of Significant Accounting Policies The Foundation prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. The Foundation s significant accounting policies are as follows: Cash and Cash Equivalents Cash and cash equivalents held by the Foundation for use in its operations include temporary investments with original maturities of three months or less. Cash and cash equivalents used by MacArthur in managing its investments are reported in investments. 6
Investments John D. and Catherine T. MacArthur Foundation Investments are reported at fair value. Fair value is based on quoted market prices when available or quoted market prices of comparable instruments when prices are not available. For investments in limited partnerships and other similar instruments, the fair value is based on valuations provided by external investment managers, including net asset values as of the most recent audited or interim financial statements. The net asset values provided by external managers are based on the underlying securities and investment holdings, which may be valued at quoted market prices, based on comparable instruments, at appraised value, or by discounted cash flows. The external managers valuations are reviewed by MacArthur management. MacArthur believes the carrying amount of these financial instruments is a reasonable estimate of fair value. Because some investments are not readily marketable, their estimated value is subject to uncertainty. Investment administrative expenses are included in investment expenses. Total investment management fees are netted against investment income, including reported management fees of $14.0 million and $14.8 million in 2017 and 2016, respectively. Program-related Investments In accordance with Section 4944 of the Internal Revenue Code, the Foundation is permitted to make investments that are related to its philanthropic programs. These investments are in the form of loans and equities and are anticipated to have a less than market return. In the year of the investment, the Foundation receives a credit toward its distribution requirement. Return of principal of program-related investments increases the Foundation s distribution requirement in the year of receipt. These investments are generally recorded at cost net of appropriate reserves for collectability. Outstanding program-related investments totaled $153.8 million and $167.3 million as of, respectively. Reserves are based on a review of borrowers credit risks, including consideration of the financial strength of borrowers, the nature of the investments, payment history, and current economic conditions. The Foundation has reserved $21.7 million and $27.7 million as of, respectively. Investments written off as bad debt totaled $1.5 million in 2017 and $3.1 million in 2016. Loans more than 30 days past due totaled $1.0 million as of December 31, 2017, and $660,000 as of December 31, 2016. The Foundation had open program-related investment commitments of $29.6 million and $20.0 million as of, respectively. Assets Held for Charitable Purposes MacArthur holds certain assets, primarily real estate, for charitable purposes. MacArthur receives a credit toward its distribution requirement equal to the fair value, as determined by appraisal, of the assets at the time they are put into charitable use. Grants Grant awards are expensed when approved. Grants payable that are expected to be paid in future years are recorded at the present value of expected future payments. MacArthur discounted grants payable using an average rate of 2.09 percent and 1.86 percent as of, respectively. 7
Federal Taxes John D. and Catherine T. MacArthur Foundation MacArthur has received a determination letter from the Internal Revenue Service indicating that it qualifies as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code and is not subject to federal income taxes except for income from its unrelated business activities. Under Section 4940(a) of the Internal Revenue Code, a federal excise tax of 2 percent is imposed on MacArthur s net investment income and realized capital gains. MacArthur qualified under Section 4940(e) of the Internal Revenue Code for a reduced tax rate of 1 percent in 2016. Deferred tax expense or benefit results from certain income and expense items, primarily unrealized gains or losses on investments, being accounted for in different time periods for financial statement purposes than for federal excise and income tax purposes. Appropriate provisions are made in the financial statements for deferred taxes in recognition of these timing differences. Due to its pass-through status, Arc is not subject to U.S. federal income tax or state income tax. Employee Retirement Plan MacArthur sponsors a defined contribution retirement plan for its eligible employees. Plan participants are fully vested after one year of service. MacArthur is current with its contributions to the plan. Employer contributions to the plan totaled $3.2 million and $3.1 million in 2017 and 2016, respectively. Post-retirement Benefits MacArthur provides health care and life insurance benefits to certain retired employees and their eligible dependents. MacArthur has recorded a liability for post-retirement benefit obligation of $61.7 million and $53.3 million as of, respectively. Estimates The preparation of the Foundation s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts in the prior year financial statements have been reclassified, with no effect on net assets or changes in net assets, to conform to the current year presentation. 8
3. Investments John D. and Catherine T. MacArthur Foundation MacArthur s investment objective is to provide a return on its investments sufficient to fund in perpetuity the grants, operating costs, and other qualifying distributions of MacArthur. Investments are made in accordance with an asset allocation policy with the objective of earning a 5 percent real return over time and preserving the portfolio corpus in real terms. Assets in the investment portfolio may include marketable debt and equity securities traded on public exchanges anywhere in the world; foreign currency investments; private debt and equity securities and partnerships; venture capital partnerships; commodities, including oil and gas assets; real estate; derivative instruments; and cash and cash equivalents. The investment portfolio is diversified to minimize the concentration risk of any single security, class of securities, or asset class. Investments at fair value as of, are as follows (000 s omitted): 2017 2016 Cash and cash equivalents $565,841 $668,609 Public equities 83,885 179,822 Public fixed income 727,532 343,865 Private equity 942,754 873,126 Private debt 378,030 356,975 Private real estate 317,086 294,906 Natural resources 365,282 360,394 Hedge funds: Equity oriented 2,000,895 1,657,446 Fixed income oriented 792,685 749,669 Global macro 444,305 485,995 Other strategies 187,928 145,405 Total Investments $6,806,223 $6,116,212 Cash and cash equivalents include cash held for investments of $104.2 million and $337.2 million and cash held by MacArthur s custodian totaling $461.6 million and $331.4 million as of, respectively. Cash held by the custodian is at the direction of MacArthur and used to implement MacArthur s investment strategies. Cash held at the direction of MacArthur associated with derivative strategies totaled $422.7 million and $305.9 million as of, respectively. Cash held as required margin for outstanding securities trades totaled $11.5 million and $14.5 million as of December 31, 2017 and 2016, respectively. Cash held for other investments totaled $27.4 million and $11.0 million as of, respectively. The amount of cash held on the reporting dates is a function of the timing of executing the investment strategies. 9
Public investments include transactions associated with marketable equity and fixed income securities that are regularly traded on public exchanges, and public securities held by funds structured either as corporations in which MacArthur owns stock or as partnerships in which MacArthur is a limited partner. Private investments include equity and fixed income investments that are not regularly traded and private securities held by corporations in which MacArthur owns stock or held by partnerships in which MacArthur is a limited partner. Hedge funds include investments with managers who have the authority to invest in various asset classes at their discretion including the ability to invest long and short. MacArthur had pending trade purchases of $166.7 million and $6.8 million as of December 31, 2017 and 2016, respectively. MacArthur had pending sales of $20.0 million and $121.7 million as of, respectively. These amounts are included in investments. Derivative Instruments MacArthur s investment strategy utilizes financial instruments that involve, to varying degrees, elements of market risk, credit risk, currency risk, and counterparty risk. These instruments are held in separately managed accounts, limited partnerships, and other fund structures. Financial instruments include securities sold but not yet purchased and derivative contracts including forward currency contracts, futures, options, and swaps. All of MacArthur s derivative positions are marked to fair value as a component of investment income. The fair value of these instruments is included in investments. In the opinion of MacArthur s management, the use of financial derivative instruments in its investment program is appropriate and customary for the investment strategies employed. Using these instruments may reduce certain investment risks and add value to the portfolio. MacArthur enters into forward currency contracts, futures, options, and swaps for tactical investment and hedging purposes. Currency forward contracts and options may be used to hedge or take positions in non-u.s. dollar exposure. Futures and swap contracts may be used to rebalance asset categories within the portfolio or to manage market exposures in portfolios. Futures, options, and swaps may be used to hedge or leverage positions within certain risk parameters. The net notional and fair values of forward contracts, futures, options, and swaps as of, are as follows (000 s omitted): 2017 2016 Net Net Notional Value Fair Value Notional Value Fair Value Forward contracts $ 231,007 $ (6,090) $ 239,159 $ 1,662 Futures 532,193-510,704 - Swaps 2,861,535 58,900 2,460,680 93,519 Total $ 3,624,735 $ 52,810 $ 3,210,543 $ 95,181 10
MacArthur is a seller of certain credit default swap contracts, which are included in the net notional value and fair value of swaps. These contracts provide MacArthur exposure to, or hedge against, a diversified portfolio of credit risks through a liquid, transparent, and standardized basket of securities. The referenced obligations under MacArthur s credit default swap contracts are composed of baskets of securities sharing similar characteristics. The individual baskets to which MacArthur has exposure under separate contracts are high-yield securities and investment grade debt. The number of individual, underlying securities referenced in each of the contracts range from 100 to 125. MacArthur is required to make payments that are proportionate to the overall notional exposure as credit events occur for individual securities in the referenced baskets. The notional value of these investments reflects the maximum amount of future payments (undiscounted) that MacArthur could be required to make should each individual security in the referenced basket experience a credit event. The following table sets forth the notional value, fair value and maturity dates of credit default swap contracts as of, respectively (000 s omitted): 2017 2016 High-yield Investment Grade High-yield Investment Grade Net notional value $ 301,000 $ 245,000 $ 276,000 $ 198,000 Fair value 25,348 5,906 17,492 3,056 Maturity date range through 2022 through 2022 through 2021 through 2021 Fair Value The fair value of investments is reported using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs within the fair value hierarchy are described as follows: Level 1 Level 2 Level 3 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. This includes securities that are infrequently traded, derivatives, and mortgage-backed securities. Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Inputs include recent transaction prices for similar assets, secondary market transaction prices for MacArthur interests in limited partnerships, independent appraisals, and private indices. A financial instrument s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. MacArthur has certain investments categorized as Level 3 where the inputs are not readily observable but the underlying assets are public investments. 11
The following tables set forth by level, within the fair value hierarchy, investment assets at fair value as of (000 s omitted). Investments using Net Asset Value (NAV) per share (or its equivalent) as a fair value expedient have not been classified in the fair value hierarchy. These investments are presented as Other in the following tables to permit reconciliation of the fair value hierarchy table to the total investments at fair value presented in the Consolidated Statements of Financial Position. The unfunded commitments, which are not included in investments, represent contractual obligations for future investments. Investment Assets as of December 31, 2017 Investment Assets by Level Unfunded Level 1 Level 2 Level 3 Other Total Commitments Cash and cash equivalents $565,841 $ - $ - $ - $ 565,841 $ - Public equities 11,119 27,316 1,125 44,325 83,885 - Public fixed income - 727,516 16-727,532 - Private equity - - - 942,754 942,754 424,709 Private debt - - 1,431 376,599 378,030 370,565 Private real estate - - 30,524 286,562 317,086 135,885 Natural resources - - 43,378 321,904 365,282 147,905 Hedge funds: Equity oriented - - - 2,000,895 2,000,895 - Fixed income oriented - - - 792,685 792,685 - Global macro - - - 444,305 444,305 - Other strategies - - - 187,928 187,928 - Total $576,960 $ 754,832 $ 76,474 $5,397,957 $ 6,806,223 $ 1,079,064 Investment Assets as of December 31, 2016 Investment Assets by Level Unfunded Level 1 Level 2 Level 3 Other Total Commitments Cash and cash equivalents $668,609 $ - $ - $ - $ 668,609 $ - Public equities 18,321 72,673 302 88,526 179,822 - Public fixed income 7 343,842 16-343,865 - Private equity - - - 873,126 873,126 372,917 Private debt - - 1,232 355,743 356,975 190,360 Private real estate - - 31,746 263,160 294,906 162,785 Natural resources - - 54,682 305,712 360,394 122,387 Hedge funds: Equity oriented - - - 1,657,446 1,657,446 - Fixed income oriented - - - 749,669 749,669 - Global macro - - - 485,995 485,995 - Other strategies - - - 145,405 145,405 - Total $686,937 $ 416,515 $ 87,978 $4,924,782 $6,116,212 $ 848,449 12
The following tables are a roll forward of those investment assets classified as Level 3 as of (000 s omitted): Roll Forward of Level 3 Investment Assets for the year ended December 31, 2017 Beginning Balance 1/1/2017 Public Equities Public Fixed Income Private Debt Private Real Estate Natural Resources Hedge Fund: Equity Oriented Total $ 302 $ 16 $ 1,232 $ 31,746 $ 54,682 $ - $ 87,978 Transfers in - - - - - - - Contributions - - - 2,172 287-2,459 Distributions (96) - - (1,111) (210) (51) (1,468) Realized gain (loss) Unrealized gain (loss) (7,002) - - (2,444) (4,619) (32,215) (46,280) 7,921-199 161 (6,762) 32,266 33,785 Transfers out - - - - - - - Ending Balance $ 1,125 $ 16 $ 1,431 $ 30,524 $ 43,378 $ - $ 76,474 12/31/2017 Roll Forward of Level 3 Investment Assets for the year ended December 31, 2016 Beginning Balance 1/1/2016 Public Equities Public Fixed Income Private Debt Private Real Estate Natural Resources Hedge Fund: Equity Oriented Total $ 1,399 $ 13 $ 987 $ 41,143 $ 72,917 $ 342 $ 116,801 Transfers in - - - - - - - Contributions - - - 1,535 - - 1,535 Distributions (874) - - (11,585) (253) (342) (13,054) Realized gain (loss) Unrealized gain (loss) (86) - - (2,413) (530) - (3,029) (137) 3 245 3,066 (17,452) - (14,275) Transfers out - - - - - - - Ending Balance 12/31/2016 $ 302 $ 16 $ 1,232 $ 31,746 $ 54,682 $ - $ 87,978 13
The following tables set forth investment assets by the amount of time, including notice period and redemption period, in which the Foundation has the legal right to receive redemptions of its investments as of (000 s omitted). For investment assets with a redemption period greater than 365 days, MacArthur s capital is expected to be liquidated over a weighted average period of 3.8 years, ranging from 1 to 12 years, as of December 31, 2017, and over a weighted average period of 3.5 years, ranging from 1 to 13 years, as of December 31, 2016. MacArthur has certain investments classified as Level 3 where it has the right to give notice and exit the investments if the investments have sufficient liquidity available. These investments are categorized with a redemption period of 90 days or less. Investment Assets by Redemption Periods as of December 31, 2017 90 Days 91 to or Less 365 Days >365 Days Total Cash and cash equivalents $ 565,841 $ - $ - $ 565,841 Public equities 83,885 - - 83,885 Public fixed income 727,532 - - 727,532 Private equity - - 942,754 942,754 Private debt - - 378,030 378,030 Private real estate - - 317,086 317,086 Natural resources - - 365,282 365,282 Hedge funds: Equity oriented 610,008 1,301,972 88,915 2,000,895 Fixed income oriented 280,182 408,470 104,033 792,685 Global macro 258,065 186,240-444,305 Other strategies - 80,019 107,909 187,928 Total $ 2,525,513 $ 1,976,701 $ 2,304,009 $ 6,806,223 Investment Assets by Redemption Periods as of December 31, 2016 90 Days 91 to or Less 365 Days >365 Days Total Cash and cash equivalents $ 668,609 $ - $ - $ 668,609 Public equities 179,822 - - 179,822 Public fixed income 343,865 - - 343,865 Private equity - - 873,126 873,126 Private debt - - 356,975 356,975 Private real estate - - 294,906 294,906 Natural resources - - 360,394 360,394 Hedge funds: Equity oriented 441,906 1,055,810 159,730 1,657,446 Fixed income oriented 236,590 388,654 124,425 749,669 Global macro 307,426 178,569-485,995 Other strategies - 62,067 83,338 145,405 Total $ 2,178,218 $ 1,685,100 $ 2,252,894 $ 6,116,212 14
4. Excise and Income Taxes Excise and income taxes in the financial statements for the years ended December 31, 2017 and 2016, include the following components (000 s omitted): 2017 2016 Federal excise taxes: Current $ 4,032 $ 2,656 Deferred taxes included in unrealized appreciation 5,547 2,406 Total federal excise taxes $ 9,579 $ 5,062 Federal and state income taxes: Current (94) 900 Total excise and income taxes $ 9,485 $ 5,962 5. Post-retirement Benefits MacArthur provides health care and life insurance benefits to eligible retired employees and their eligible dependents. The following table presents the plan s funded status reconciled with amounts recognized in MacArthur s Statements of Financial Position at (000 s omitted): 2017 2016 Accumulated post-retirement health care benefit obligation: Active participants immediately eligible for benefits $ 15,425 $ 12,952 Active participants not immediately eligible for benefits 13,274 10,624 Inactive participants 33,017 29,715 Accumulated post-retirement health care benefit obligation $ 61,716 $ 53,291 Fair value of plan assets - - Accumulated post-retirement health care benefit obligation in excess of plan assets $ 61,716 $ 53,291 Net periodic post-retirement health care benefit costs for the years ended December 31, 2017 and 2016 include the following components (000 s omitted): 2017 2016 Service cost of benefits earned $ 1,188 $ 1,554 Interest cost on accumulated post-retirement health care benefit obligation 2,198 1,923 Post-retirement health care benefit actuarial loss 1,022 693 Net periodic benefit cost $ 4,408 $ 4,170 15
Future expected health care payments are as follows (000 s omitted): 2018 $ 1,895 2019 $ 1,981 2020 $ 2,059 2021 $ 2,144 2022 $ 2,243 2023-2027 $ 12,659 The following table presents the status of the plan reconciled with the amounts reported in MacArthur s Statements of Financial Position and Statements of Activities and Changes in Net Assets as of and for the years ended (000 s omitted): 2017 2016 Accumulated benefit obligation, beginning of year $ 53,291 $ 46,137 Service cost of benefits earned 1,188 1,554 Interest cost on obligation 2,198 1,923 Actuarial loss 6,607 5,341 Less: Net employer benefits paid 1,568 1,664 Accumulated benefit obligation $ 61,716 $ 53,291 Information about assumptions as of is as follows: 2017 2016 Weighted average assumptions: Discount rate (benefit obligations) 3.60% 4.10% Discount rate (net periodic costs) 4.10% 4.10% Expected return on plan assets N/A N/A Health care cost trend rate assumptions: Trend rate for the next year 5.50% 5.30% Ultimate trend rate 3.76% 3.86% Year ultimate trend rate is reached 2040 2040 16
6. Commitments and Contingencies Guarantees MacArthur enters into guarantees to advance its program goals. Total outstanding guarantees were $58.5 million and $51.3 million as of, respectively. MacArthur records a liability if it is more likely than not a guarantee will be called and the expected amount to be called can be estimated. These liabilities totaled $5.5 million and $5.7 million as of, respectively. Line of Credit MacArthur has a $250 million unsecured committed line of credit carrying an interest rate of either LIBOR plus 45 basis points or Prime. MacArthur has no notes outstanding under this line of credit agreement as of. On June 17, 2016, Arc established a line of credit (the facility ) with Calvert Social Investment Foundation, Inc. ( Lender ). On the same day, Arc entered into a promissory note with Lender, wherein Arc promises to repay any principal amount due, up to the maximum amount of $50 million, to Lender on June 17, 2031. As of, a total of $23.3 million and $3.3 million, respectively, was drawn on the facility. As a registered investment adviser, Lender is selling up to $50 million in Chicago-based Community Investment Notes ( CINs ) to investors who wish to participate indirectly in the mission and impact investments of Arc. Lender will set certain borrowing thresholds for Arc based on the outstanding balances of targeted Chicago CINs purchased ( TCCPs ) by investors and Arc must make quarterly draw requests equal to the borrowing threshold. Each draw matures quarterly, and upon maturity, each draw is required to be rolled over for at least the Minimum Balance which represents the amount Lender has in outstanding balances on TCCPs at that time. As of December 31, 2017, Arc was in compliance with all debt covenants or has received waivers with respect to any non-compliance thereof. Legal Actions MacArthur is involved in several legal actions. MacArthur believes it has defenses for these claims, believes the claims are substantially without merit and is vigorously defending the actions. In the opinion of management, based on advice of legal counsel, the final disposition of these matters is not expected to have a material effect on MacArthur s financial statements. 7. Subsequent Events Management has performed an analysis of the activities and transactions subsequent to December 31, 2017, to determine the need for any adjustments to or disclosures within the audited financial statements for the year ended December 31, 2017. Subsequent to December 31, 2017, Arc made additional draws of $22.2 million from the Lender. Management has determined there are no other subsequent events to disclose. Management has performed its analysis through June 13, 2018, the date the financial statements were available to be issued. 17
Supplemental Schedules
Consolidating Statements of Financial Position December 31, 2017 (000 s omitted) MacArthur Arc Eliminations Total Assets Cash and cash equivalents $ 3,867 $ 16,567 $ - $ 20,434 Investments 6,806,223 - - 6,806,223 Program-related investments 125,809 6,267-132,076 Assets held for charitable use 28,607 - - 28,607 Other assets 12,467 373 (413) (a) 12,427 Total assets $ 6,976,973 $ 23,207 $ (413) $ 6,999,767 Liabilities and net assets Grants payable $ 534,187 $ - $ - $ 534,187 Other liabilities 80,899 23,819 (413) (a) 104,305 Excise and income taxes 22,045 - - 22,045 Total liabilities 637,131 23,819 (413) 660,537 Unrestricted net assets 6,339,842 (612) - 6,339,230 Total liabilities and net assets $ 6,976,973 $ 23,207 $ (413) $ 6,999,767 (a) Elimination of inter-entity accounts receivable/payable See accompanying independent auditor's report. 18
Investment income John D. and Catherine T. MacArthur Foundation Consolidating Statements of Activities For the year ended December 31, 2017 (000 s omitted) MacArthur Arc Eliminations Total Interest, dividends and other income $ 26,469 $ 119 $ - $ 26,588 Realized gain on investments 689,709 - - 689,709 Total investment income 716,178 119-716,297 Investment expenses Administrative 16,328 - - 16,328 Excise and income tax 3,938 - - 3,938 Total investment expenses 20,266 - - 20,266 Unrealized gain on investments 271,228-590 (a) 271,818 Net investment income 967,140 119 590 967,849 Operating expenses Grants authorized 470,710 - - 470,710 Administrative 51,099 1,321-52,420 Post-retirement benefits 7,994 - - 7,994 Total operating expenses 529,803 1,321-531,124 Change in unrestricted net assets 437,337 (1,202) 590 436,725 Unrestricted net assets, beginning of year 5,902,505 590 (590) (a) 5,902,505 Unrestricted net assets, end of year $ 6,339,842 $ (612) $ - $ 6,339,230 (a) Elimination of equity interest in Arc earnings See accompanying independent auditor's report. 19
Cash flows from operating activities John D. and Catherine T. MacArthur Foundation Consolidating Statements of Cash Flows For the year ended December 31, 2017 (000 s omitted) MacArthur Arc Eliminations Total Change in unrestricted net assets $ 437,337 $ (1,202) $ 590 (a) $ 436,725 Adjustments to reconcile change in unrestricted net assets to net cash used in operating activities Depreciation 1,735 - - 1,735 Amortization of deferred financing costs - 27-27 Realized gain on investments (689,709) - - (689,709) Unrealized gain on investments (271,228) - (590) (a) (271,818) Decrease (increase) in non-investment assets 3,750 (6,281) 200 (b) (2,331) Increase in grants payable 222,196 - - 222,196 Increase in other liabilities 14,080 302 (200) (b) 14,182 Increase in excise and income taxes 11,474 - - 11,474 Net cash used in operating activities (270,365) (7,154) - (277,519) Cash flows from investment activities Proceeds from sale of investments 2,434,693 - - 2,434,693 Purchase of investments (2,163,177) - - (2,163,177) Net cash provided by investment activities 271,516 - - 271,516 Cash flows from financing activities Proceeds from notes payable - 19,988-19,988 Net cash provided by financing activities - 19,988-19,988 Net increase in cash and cash equivalents 1,151 12,834-13,985 Cash and cash equivalents at beginning of year 2,716 3,733-6,449 Cash and cash equivalents at end of year $ 3,867 $ 16,567 $ - $ 20,434 Supplemental disclosure of cash flow information Cash paid for interest $ - $ 301 $ - $ 301 (a) Elimination of equity interest in Arc earnings (b) Elimination of inter-entity accounts receivable/payable See accompanying independent auditor's report. 20